The recent rebound in European stocks ran out of steam on Wednesday as UK shop prices surged at the fastest rate in 14 years, while Wall Street declined on the back of weak US GDP figures.
The FTSE 100 (^FTSE) was down almost 0.2% in London, with investors unable to avoid the pervasive fear of a global slowdown, while the French CAC (^FCHI) tumbled 0.9% and the DAX (^GDAXI) was 1.6% lower in Germany.
It came as the British Retail Consortium (BRC) said retailers were having to pass on some of the burden of higher raw material costs, leading to the biggest price increases since September 2008.
Food was the biggest driver of inflation, with prices rising 6% in the year to June.
Meanwhile, Sweden and Finland are poised to join NATO after Turkey agreed to drop a block on the Nordic countries' application.
Turkey was initially angered by what it believed was their willingness to host Kurdish militants. Sweden and Finland could not join Nato without the country's support.
Elsewhere, the UK will cut off gas supplies to mainland Europe as part of a four-stage emergency plan drawn up to counter the Russian energy crisis.
The inter-connector pipelines to the Netherlands and Belgium will be shut down by National Grid if supplies fall short in the coming months.
The British government told the Financial Times it was “fully confident” about the security of energy supply heading into the winter, adding that a gas emergency was “extremely unlikely”.
However, Morgan Stanley now predicts the ongoing crisis will push the eurozone into a mild recession in the fourth quarter of this year.
They expect the economy to contract for two quarters before resuming growth in the second quarter of next year.
The move higher came despite the American economy contracting in the first quarter amid a record trade deficit.
US GDP fell 1.6% on last year, revised down from initial estimates of a 1.5% decline, the latest official data showed. This was compared to 6.9% growth in the fourth quarter.
The Federal Reserve is also looking at aggressively tightening monetary policy to combat inflation, heightening fears of a recession.
After a strong opening on Tuesday, the major US indices were unable to hold on to the gains, with a disappointing consumer confidence reading taking the wind out of investors’ sails.
The reading of 98.7 was below estimates of 100 and down from 103.2 in May, with the immediate outlook for the next six months also dipping. At the same time, inflation expectations remain elevated for the next year.
“With the consumer being central to US economic growth, the recent raft of pessimistic readings has led to some concerns that sentiment could become self-fulfilling as consumers hunker down in the face of higher prices, especially fuel and food,” Richard Hunter, head of markets at Interactive Investor, said.
“The Federal Reserve will of course be aware of the deteriorating sentiment, but for the moment is showing no signs of abandoning its primary objective of battling inflation head-on.”
Watch: Stocks slump after data shows consumer pessimism
In the year to date, the Dow Jones remains down by 15% and the S&P 500 by 20%. The Nasdaq is on course for its worst quarterly performance since 2008 and is currently down by 28%.
Stocks in Asia dropped overnight, struggling to hold on to gains arising from the recent announcement of a relaxation of quarantine requirements for inbound passengers.
This followed the sharp sell-off on Wall Street amid concerns about the impact of runaway inflation on the economy.
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